Why Facebook Didn't Tank (Again)

A funny thing happened on the way to Facebook's second lockup expiration Wednesday — it sent the bears running for cover, unlike lockup expiration version 1.0 back in August.

This is good news — but it's not all good.

The good news is obvious enough: Facebook shares not only held their own but rallied — more than on any other day of the company's brief, rocky existence as a public company. Shares shot up about 13%, to close at $23.23. And to emphasize that wasn't some kind of irrationally exuberant fluke, $FB was essentially flat and in line with a slightly down NASDAQ in early Thursday trading.

The bad news is not as obvious: Insider holders of Facebook stock saw the prospect of dumping as many as 800 million shares on the market all at once as a holding opportunity — not a chance to cash in on a windfall that is a significant part of their compensation package.

The "maybe good, maybe bad" news? Strong, counterintuitive performances like this shift the conversation from talk about the stock to talk about fundamentals (see below).

The bottom line: Was Wednesday's performance about confidence that there might be a real upside to Facebook? Or was it resignation — "I've lost this much on paper I might as well just ride it out because it's just gotta get better?"

It is a rich-person's problem, but a real one in the startup space, where for every Google there's a Groupon, a Zynga — and a Facebook.

The second lockup expiration was in stark contrast to the first. On August 16 a mere 22 million shares were unshackled. Facebook stock hit a new intra-day low, and closed down 6%, to $19.87 — ironically, a penny higher than its Tuesday, pre-lockup-expiration close.

We don't know how that history may have weighed on insiders. But the market, in the broadest terms, spoke clearly: Buyers were looking to pounce on a fire sale that didn't happen. Potential counterparties, who might have been on the fence, saw their procrastination (or bravery) rewarded. Some of the upside could have been short covering — shorts retreated in September but increased somewhat by the end of October. They had borrowed 88 million shares — about 10% of the lockup — by Oct. 31, probably in anticipation of a different dynamic on Nov. 14.

None of this relates to the fundamentals, of course. Facebook still has to "solve" the mobile revenue problem to justify even a $50 billion valuation. Marketers -- most visibly maverick investor Mark Cuban -- are miffed at increased fees they see as onerous taxes for the right to communicate in masse with their Facebook fans. The world's largest social network still has to thread a very narrow needle of monetizing their members without driving them away, which is the dilemma and fate of every single social network before Facebook.

And Facebook still sports a whopping 200 P/E ratio. To put that in context: if Google, Facebook's biggest rival for online ad revenue, were trading at that level, each share would be worth $6,500 — 10 times its current market cap.

But if you're looking for some good, unexpected news, strength when there should have been weakness is a good thing. And more good news: this was the biggest of Facebook's three insider selling windows. The third and last is in six months, when 177 million shares are released from their restrictions.

But the fundamental question remains: Is Facebook really a buy in the low 20s, a wait and see or strictly not for the faint of heart? What do you think?

(Image: DonkeyHotey/Flickr)